How to Avoid the Tax Bill Shock After Receiving Vested Shares

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How to Avoid the Tax Bill Shock After Receiving Vested Shares

Do you have to pay tax if your tech company employer pays you equity as part of your salary package?

Working for tech companies has many benefits: breakfasts and lunches, gym and health coverage, and very generous equity packages. You work hard, and you earn hard. But are you prepared for the tax consequences when your employer pays you in equity, like company shares?

Your company share schemes can have a rollercoaster of tax implications that are never fully understood by employees and leave them unable to enjoy the ride. A qualified tax adviser can bust some myths and provide clarity so employees can confidently make decisions for the benefit of their own future and financial wellbeing.

The following information does not constitute individual tax advice and is general in nature. We recommend you seek independent personal tax advice before applying for any of these strategies. This blog looks at common themes affecting employees and does not consider company FBT issues.

Avoiding nasty tax surprises

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Imagine receiving a large bonus of shares from your employer and having the thrill of your hard-earned reward pulled out from underneath you once you realise how much of that will actually be going to the tax office. It happens to more people than you might think. After receiving their share-based bonus and then visiting the tax agent for their annual tax return, it’s not uncommon for some employees to discover they actually owe tens of thousands of dollars to the Australian Tax Office (ATO). So, how does one avoid the shock, confusion and steep learning curve when discovering their tax debt from receiving Restricted Share Units (RSU’s) or being part of an Employee Share Purchase Plan without trawling through the entire ATO website?

Let’s break down the things that influence how much you need to pay in tax:

Knowing your taxable income

The first step is to understand what makes up your salary. To help illustrate the things to consider, we’ll use “Sarah”, who works in software sales for a global technology company based in Australia.

Her base salary is approximately $172,000, including cash commissions and bonuses. She also receives generous company perks valued at $8,000. As part of her salary package, Sarah will receive company shares detailed in her vesting schedule.

In the 2023-2024 financial year, she was issued $50,000 in shares, which vested each quarter on top of her base salary.

Sarah’s salary + Restricted Share Units = $230,000.

Sarah’s company withholds tax on her base salary and allowances only of approximately $55,267, but not on the vested shares.

Sarah’s income is taxed at 45% for every dollar after $180,001 for the 2024 financial year, and she also has to pay a Medicare Levy of 2% of her taxable income

Her total tax bill is $78,767, and once the employer’s withholding is taken into consideration, Sarah will have a tax bill of $23,500.

If this sounds like a lot, it’s worth looking at how much tax you actually pay, which then puts you in a better position to make budgetary or planning decisions.

ALLOWANCES

Are your company’s perks taxable allowances?

Sarah’s company provides Private Health, a Fitness pass, and other great personal benefits. To Sarah, these are perks she receives because she works for a great company, but to the ATO, this all counts as taxable benefits and is treated as income in your tax return.

The ATO does not allow employers to provide free benefits to some and not to others. Therefore, non-deductible benefits (like Private Health Insurance and fitness benefits) can be taxed, just like income.

This is different to if Sarah receives a motor vehicle allowance that requires her to drive to clients or a working-from-home allowance. She may be able to offset this allowance with allowable deductions.

VESTED SHARES

What happens if I have vested shares and no tax is withheld?

While it’s awesome for employees to have the opportunity to own shares in the company’s growth, the tax implications of their equity can make things a little more complicated and can lead to tax bill shock.

Sarah was issued unvested shares, and after a certain period of employment had passed, a percentage of those shares would vest, meaning Sarah is now the official owner of the shares. She can choose to keep or sell them as she wishes. However, when shares vest, they are viewed by the ATO as part of your salary or wage, meaning they are a form of taxable income that is assessed for tax which becomes payable. Their value is the market value of the share on that day.

The big difference between receiving vested shares instead of cash bonuses is that the company needs to pay the tax on your behalf to the ATO as with a normal salary. Meaning Sarah has a tax liability and responsibility to pay the ATO.

Over the 2023 financial year, Sarah had a value of $50,000 in shares vested. Because she was already in the highest tax bracket, that meant an additional tax of $23,500.

It’s important to understand that any income from vested shares will be taxed (and it helps to save for it!), so we recommend proactively looking at your employee share scheme and vesting schedule to determine if you’ll have vested shares in the next tax year and plan for it.

Save vs Sell

What do I do if my company equity leads to a big tax bill that I was not prepared for?

Sarah was shocked and didn’t have enough saved to pay her $23,500 tax bill. She had two main options: Save for the Tax or Sell shares to pay the tax.

Sell the shares

When selling an investment asset like the company shares you own (i.e. vested shares), this creates another tax event called a Capital Gains Tax Event. And there are CGT rules to consider.

Many ask, ‘Am I being double taxed on the shares I received? The answer to that is No. 

You pay income tax on the vested share portion and then Capital Gains tax on the profit (if any) when you sell your shares. 

Capital Gains Tax (CGT) Considerations

Because company shares fluctuate in value over time, Sarah needs to see if she will gain a profit or if she has lost value on her shares. This is commonly called a capital gain or capital loss. Capital Gains Tax (CGT) is the tax imposed on the profit or gain you make when selling shares. 

Loss on Share Sale

Capital Loss arises when the sale of your shares is a lesser value than when you purchased them. Meaning the market share price fell during the period you owned them.

If the price drops on the day she sells her shares, she will make a loss. 

For example, if the value of Sarah’s shares at the vesting date was $150 but the value of 1 company share on the day she sells it is $120, she will incur a $30 loss on each share.

It is important to note that if you experience a capital loss in a particular year, it is not offset against your employment income, meaning it will not reduce your tax bill. Losses can only be offset against other capital gains in that year or future years. 

Profit on Share Sale

If the price has increased on the day she sells her shares, Sarah will make a profit. 

For example, if the value of Sarah’s share at the vesting date was $150 but the value of 1 company share on the day she sells is $180, this is a profit of $30 per share.

It is important to note the 50% Capital Gains Discount on profits for shares held for 12 months or more. If Sarah sells her shares after 12 months of ownership, she can apply a 50% discount on the capital gain. For example, Sarah’s current profit is $30 and she will only pay tax on $15 per share.

It is also important for Sarah to not only understand her timing options but also to pay close attention to fluctuations in her company’s share price. Tax savings and timing the sale of your share is only one consideration. Market forces and the volatility of the company’s share price are very important considerations in the timing of your share sales.

What happens when this is all too stressful?

Sarah expressed that it was overwhelming to understand the timing, the market and the tax obligations when receiving her vested shares. However, she knew that she loved her company and saw the future potential and its share growth and wanted to benefit from that but struggled to budget her lifestyle for the tax payable whilst keeping her share investment.

Never experience tax bill shock ever again.

After a conversation with her tax accountant, Sarah decided to sell 50% of her shares at the point of vesting to cover her tax bill. Her tax rate was 45% + 2% Medicare, so her share sold would cover the tax portion. And if her shares vested at $150 and she sold them at $150, she had no gain or loss to worry about. Then, she could keep the other 50% of her shares and watch her shares grow along with the company she was a part of.  

A good accountant will also consider Sarah’s short and long-term goals and discuss other options to help her make her money work harder and smarter for today and into her future – from deductible super contributions assessing for Division 293 Tax to accessing schemes that may help Sarah purchase her first home.

Tax can seem complicated, but registering with a good accountant can leave you walking out of their office feeling empowered with a better understanding of practical and achievable next steps. Tax planning with a qualified, proactive accountant can help people like Sarah take better control of their finances and enjoy their hard-earned money without the risk of nasty surprises in their next tax return.

About YOUtax

YOUtax is an award-winning digital accounting firm on a mission to make tax and financial wellness services easily accessible to everyone who needs them. We partner with organisations to provide time-poor employees across Australia with an easy-to-access and easy-to-understand Financial Wellness Program that includes education, tax planning and advisory services. 

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